Ramped-up violence in the Red Sea seems increasingly certain to crush the first signs of spring growth in cargo flows in the region, only a few short weeks after a ceasefire was first announced.
Ships carrying middle distillates from the east of Suez are already diverting from the Red Sea route. At least one Long-Range (LR) tanker carrying gasoil and jet fuel that loaded from the Mideast Gulf in the second week of March diverted from the Red Sea route, vessel-tracking data from trade analytics firms Kpler and Vortexa show. The vessel is now sailing via the longer route around the Cape of Good Hope to discharge in northwest Europe in the second half of April.
The Sti Guard, which loaded more than 530,000 bl of gasoil from Qatar’s Ras Laffan refinery on 10 March, rerouted on 14-15 March to avoid the Bab el-Mandeb strait, where Yemen’s Houthi rebels previously launched numerous attacks on passing vessels.
Diversions have come as escalating tensions in the Middle East prompted Yemen’s Houthi rebels to announce that they will now target US vessels traversing the Red and Arabian seas, in addition to Israeli-linked vessels, causing some tankers to divert. The US military has responded by launching a series of air strikes against Houthi-controlled areas of Yemen in the first bombing of Houthi targets since Donald Trump returned to the presidency in January.
At least two clean LR2 tankers, the Al Dasma and Sea Star, remain on track to transit through the Bab el-Mandeb strait as not all vessels are diverting away.
About 275,000 b/d of clean products were carried through the Bab el-Mandeb strait in February from the east of Suez to the west of Suez markets, after the Houthis announced a reduction in vessel attacks. This was up from 89,000 b/d in January, but the increase is likely to vanish if attacks step up again. But any increase is still substantially below the 1.0mn-1.2mn b/d monthly average from before the Houthi attacks started.
Red Sea costs remain a deterrent
On the whole, the return to the Red Sea has been slow despite the Houthi announcement as the cost of additional insurance can be high enough to wipe out any savings made from the shorter journey, meaning there are few vessels available to divert back around the Cape of Good Hope.
Sailing through the Bab el-Mandeb strait and Suez Canal will mean a saving of about 16 days of voyage time (at 12.5 knots) on a Ras Tanura-Rotterdam LR2 voyage, which saves about $275,000 in fuel costs at current Rotterdam prices for an LR2 tanker (35 t/d of fuel consumption). This saving would be compounded by a vessel-hire cost of $26,500/d (the current time charter equivalent for Ras Tanura-Rotterdam via Cape) at current rates, for a total saving of $700,000.
Sailing through the Suez would require a fee of $525,000 to transit the canal, reducing this saving to just $175,000 to sail to Europe through the Bab el-Mandeb strait.
But crossing the strait also requires an Additional War Risk Premium payment of $420,000 (0.4pc of an approximate hull and machinery value of $105mn for an LR2). Even with a 50pc no-claims bonus (discount applied when no claim is made on the insurance), this would wipe out any saving made on the route.
Charterers still will prefer the shorter route but the absence of a financial incentive will mean there will not be significant pressure on shipowners to return to the Red Sea region.
In addition, the arbitrage economics for shipping gasoil from the east of Suez towards the west may weaken again because of recent escalating tensions in the Bab el-Mandeb strait and Red Sea. The east-west gasoil spread also has been narrowing over the past week because of slowing demand in the Amsterdam-Rotterdam-Antwerp (ARA) hub. The Singapore gasoil EFS spread – the spread between the Singapore 10ppm sulphur gasoil swaps against Ice gasoil futures – narrowed to about minus $21/t on 17 March from about minus $28/t a week earlier, indicating a less favourable east-west arbitrage.
Russia trade unaffected
Tankers carrying Russian Urals crude will probably continue sailing through the Red Sea, the fastest route to India, despite the escalating tensions.
Of the 53 tankers laden with Urals at present, just one is heading around South Africa’s Cape, according to Kpler data, although it is possible that some of the vessels that recently loaded in the Baltic and Black seas still could take the Cape route.
The shortest way to ship Urals to India, the grade’s largest outlet, is through the Red Sea. The journey takes about a month, while the Cape voyage takes an additional two weeks and results in Urals not being able to compete as closely with India’s other suppliers. Crude from Iraq is delivered to India’s west coast within a week.
In addition, Houthi spokespersons have repeatedly indicated the Russian-linked vessels and cargoes will not be targeted.
This assertion does not always match the situation on the ground, and several vessels carrying Russian material have been attacked in the past year. The Greek-owned and operated Kamsarmax Tutor sank with a cargo of coal from Ust-Luga on board after being attacked by an unmanned surface vehicle in June 2024, while several other ships also have been attacked.
Russian clean and crude exports account for the majority of west-to-east trade through the Suez Canal and into the Bab el-Mandeb strait.
Author: John Ollett, Editor, Argus Freight
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